Insurers will be forced to demonstrate that writing new with-profits business will not adversely effect policyholders’ interests under proposals outlined by the FSA today.
The regulator plans to clamp down on providers writing “loss-leading” new with-profits business amid concerns a “substantial minority” of firms are failing to secure sufficient capital to cover the costs of acquiring it.
The FSA says the current rule on new business, Cobs 20.2.28R, may not prevent the erosion of value of a with-profits fund as a result of companies making price promises they could struggle to keep.
The regulator says that, as a result, policyholders could suffer “material detriment”.
It says: “A substantial minority of firms have been writing new business into their with-profits funds that is loss leading in itself – that is it is priced in such a way as to make it attractive to advisers and/or customers but it will never break even – or not enough of it is being sold to cover the cost of acquiring it.
“In both cases the consequence is that the new business being written erodes the value of the with-profits fund. This, in turn, means that over time there is less money available to distribute to with-profits policyholders.
“We believe that, given these findings, the rule as it is currently framed does not necessarily achieve the intention of preventing erosion of the value of the with-profits fund.
“In other words, it gives scope for minor or ‘immaterial’ detriment. Our concern is that over time even minor detriment, when aggregated, has the capability to become material detriment.”
The wide-ranging paper also proposes removing the ability of firms to apply market value reductions on the grounds of surrender volumes only, so an MVR may only be applied where the face value of the policy is higher than the value of the underlying assets.
The consultation, titled ‘Protecting with-profits policyholders’, follows a commitment from FSA chief executive Hector Sants to the Treasury Committee in 2008 to review the way in which firms have implemented the rules in Cobs 20. This in turn triggered the With-Profits Regime Review, which has informed the consultation.